Inflation—friend or foe?

The Consumer Price Index (CPI) surged eight tenths of a percent in April to 4.2% – the biggest monthly jump in more than a decade, according to the U.S Bureau of Labor Statistics.

The spike in prices in April was also the largest year-over-year increase since 2008, when the CPI rose 4.9 percent over a 12-month period ending in September of that year.

If you’ve bought anything lately, from food to furniture, this news is likely not a surprise. Like many consumers, I cannot believe how much things cost now. It does not matter whether it is real estate, lumber or a simple cup of Starbucks coffee. Everything is more expensive than a year ago.

We have not had runaway inflation since the late 60s and 70s. Back in that era, OPEC decided to limit the supply of oil, so gasoline prices skyrocketed. This caused the prices of other goods and services to go up.

Even worse, there was also very little economic growth because of international competition from Japan, the costs of the Vietnam War and the demise of manufacturing jobs. All this led to a period of stagflation, rising prices and higher unemployment. The Federal Reserve had to let interest rates get as high as 15% before inflation subsided.

Today we also have rising prices of gasoline and every other commodity like lumber, steel and copper. However, these higher prices seem to be caused but shortages in inventory caused by the COVID shutdowns and supply chain issues.

We tend to think of inflation as a bad thing, but it can be a good thing depending on what role you occupy in the economy and whether you’re buying or selling assets.

Good Thing

Inflation is a good thing if you own a home, stocks, or a cash flow business. Odds are these assets are up significantly. In fact, with real estate, since there is zero inventory and such huge demand, people are not moving because they cannot find a place to go.

This tight supply is only driving up real estate prices even further. Stocks are trading at all-time highs and if you own a successful cash flow business there are a lot of interested private equity buyers.

Bad Thing

Inflation is not so great if you are building a new home or a manufacturing plant since the materials needed to complete those projects have skyrocketed in price. Big ticket items like appliances and cars are also in short supply, leading to price increases. It can take a year to get a new refrigerator.

Labor costs are also rising. If you are a small business owner operating a service business like a restaurant, ski area or hotel, you will need to pay your workers a lot more with higher hourly wages and a possible starting bonus. Walmart, Amazon and McDonald’s recently raised wages to $15 an hour. Other companies cannot be far behind. Higher wages reduce profit margins for companies.

Federal Reserve Chairman Jerome Powell recently stated that inflation fears are overblown, and these rapid increases in prices are merely transitory.

Once supply chain bottlenecks caused by the COVID shutdown and Suez Canal blockage abate, inventories should increase and inflation fears will be short lived. Let us hope he is right. Just do not tell that to anybody building a house or ordering a stove.